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NEW DELHI: Equity, bond and currency markets were trading cautiously on Friday as the Finance Minister Piyush Goyal arrived at the Finance Ministry with his briefcase ahead of unveiling of the Modi government’s last Interim Budget at 11 am.
The Budget is important, as it comes ahead of the general elections in May.
But analysts and economists say the Budget announcements are likely to have bigger impact on bond market than equity market.
They believe a slight slippage on the government’s fiscal deficit target should not hurt sentiment much.
It is the quality of deficit which may matter.
At 9.42 am, the rupee traded cautiously at 71 level, while 10-year bond yields ruled unchanged around 7.49 per cent.
Equity barometer Sensex was up 100 points.
“The Budget is a far more important event for the bond market than stock market.
I really cannot see how an Interim Budget just before an election can move the stock market.
But the bond market is at a sensitive juncture.
I think the Finance Minister would have called up the US Federal Reserve to say a ‘thank you’ for the Fed policy earlier this week for calming down the bond market,” said Saurabh Mukherjea, Founder, Marcellus Investment Managers.
“If the fiscal deficit is between 3.3 and 3.5 for this year, the bond market should be alright.
The FM is highly likely to announce some sort of a scheme for the poor, specifically for farmers, now what sort of adverse impact will it have on bond yields is the key question.
Therefore, the FY20 fiscal deficit projection also becomes sensitive.
The stock market is a side show today.
The focus on 10-year bond yield and the impact on the forex market would be star attractions of the day,” Mukherjea said.
Sajjid Chinoy of JPMorgan said the market is not always very rational and, therefore, it is hard to see what it will glean out of it.
“In the last few weeks, we have seen some pressure on Indian bond yields despite expectations of a rate cut in the next few months, suggesting that there is some fiscal nervousness.
We saw that a little bit on bond yields and currency as well.
But the government has got a good track record on the Centre’s deficit.
I do not think there will be a major breach,” Chinoy said.
The reason markets are nervous is not so much because of the centre’s fiscal profligacy.
“We are in the situation, what I call a fiscal trilemma, where on the one hand we want to reduce financial repression and bring down SLR ratios for banks, which is a good thing, and on the other hand, we are justifiably wary of more foreign participation in the bond market, which is also understandable,” Chinoy said.
If there are large slippages and the market senses that there are new unfunded liabilities coming up at a time when GST collections are undershooting, that could lead to some nervousness, he said.
